Case Summary
In January 2015, the Oregon Department of Environmental Quality finalized a low-carbon fuel standard (LCFS) that is similar to California’s. Under Oregon’s standard, various types of fuels are assigned carbon intensity values based on a lifecycle emission analysis that accounts for the type of fuel, its production and distribution, and other factors. Each entity that produces fuel in Oregon or imports fuel into the state must meet average carbon intensity limits across all of its products. It can demonstrate compliance by producing or importing only fuels that meet the standard, by producing or importing fuels that meet the standard in aggregate, or by purchasing credits generated by fuels below the standard to reduce the average intensity of its products.

Three trade associations filed suit in federal district court, arguing that the LCFS violates the dormant Commerce Clause and the Supremacy Clause. With regard to the dormant Commerce Clause, their complaint highlights that the only fuels produced in Oregon are biofuels that meet the carbon intensity standard. Biofuel producers could sell into the Oregon market at will, or generate credits and sell those credits to importers of other types of fuel. The complaint argues that the LCFS is designed as an incentive to these producers and therefore “discriminates in favor of Oregon industry at the expense of out-of-state industry.” It also argues that by considering out-of-state production processes in setting carbon intensity limits and measuring the carbon intensity of a product, Oregon is impermissibly regulating out-of-state conduct.

With regard to the Supremacy Clause, plaintiffs’ complaint allege that the LCFS is preempted by two provisions of the Clean Air Act. Section 211(c) prohibits any state from regulating “any characteristic or component of a fuel” if EPA has determined that such regulation is not necessary. Plaintiffs’ complaint argues that EPA determined not to regulate methane under this section, so Oregon’s LCFS, which incorporates methane emissions, is therefore preempted. Plaintiffs also argue that the LCFS conflicts the federal Renewable Fuel Standard (RFS). They claim that the LCFS penalizes facilities that were exempted from the federal RFS and “stands as an obstacle to the congressional purpose of ensuring a continued nationwide market” for renewable fuels.

In September 2015, the district court dismissed all claims, finding that the dormant Commerce Clause claims were “largely barred by on-point precedent,” the Ninth Circuit’s decision about California LCFS. The district could also dismissed all Clean Air Act preemption arguments. Three years later, the Ninth Circuit affirmed the district court’s decision, relying on its prior decision about California’s policy. Applying its that case, the majority quickly dismissed claims of facial discrimination, discriminatory purpose, and discriminatory effects. The panel also dismissed plaintiffs’ extraterritoriality claims and tersely rejected a claim that the LCFS unduly burdens interstate commerce.

While the decision largely recycles the Ninth Circuit’s 2013 decision and subsequent denial of hearing en banc, it also amplifies those prior decisions’ conclusions that local economic benefits do not render a state climate policy invalid under the dormant Commerce Clause. Citing the Supreme Court’s landmark decision in Massachusetts v. EPA, the decision observes that “it is well settled that states have a legitimate interest in combating the adverse effects of climate change.” Recognizing that our federal system allows each state “to serve as [policy] laboratory,” the panel finds that this “freedom would be meaningless” if state officials were prohibited by the dormant Commerce Clause from promoting the local economic benefits of environmental policies. So long as the state policy is not “enacted for the purpose of supporting a uniquely local industry,” local economic benefits and elected officials’ statements touting those benefits should not doom a state climate policy.

With regard to plaintiffs’ Clean Air Act claim, the panel concluded that EPA’s decision not to regulate methane under § 211(k), which addresses reformulated gasoline, “is not a finding that regulating methane’s contributions to greenhouse gas emissions is unnecessary, and thus is not preemptive under § 211(c).”